Cogencis, Thursday, Apr 30

On his last day as governor of the Reserve Bank of India, Duvvuri Subbarao advised Raghuram Rajan to follow the example of Arjuna and not Abhimanyu.

Subbarao, who took charge as governor in 2008, a week before Lehman Brothers filed for bankruptcy and remitted office at the height of the taper tantrums in 2013, wanted his successor to get the Indian economy out of the economic 'chakravyuh' it found itself in, alluding to the military formation in the Mahabharata that had trapped Abhimanyu and resulted in his death.

'Chakravyuh' was a recurring theme for Subbarao.

"Getting out of an expansionary policy is incredibly more complex than getting into it... it's like 'chakravyuh' of Mahabharat, it's very easy to get in but very difficult to get out," Subbarao had said almost three years earlier in 2010.

India is probably entering another 'chakravyuh', with the government on the verge of announcing a fiscal stimulus to get the economy out of the current morass. India urgently needs a fiscal stimulus as the GDP is threatening to contract for the first time in over 40 years in 2020-21 (Apr-Mar) with most sectors virtually at a standstill because of the lockdown to combat the COVID-19 pandemic.

Even as India seemingly nears an exit from the nationwide lockdown, many sectors of the economy such as aviation, hospitality, non-banking finance, and small and medium enterprises are fighting to survive. Similarly, the financial position of state governments, which are on the frontline in the fight against the pandemic, is precarious as most of their normal revenue streams have vanished overnight.

The government has no choice but to announce a massive fiscal stimulus to avert deepening of the crisis. And unlike 2008, when global demand was hit by the financial crisis, there are now severe challenges to both demand and supply.

What is as important as taking steps to revive the economy is a plan to exit the stimulus. As RBI Governor Shaktikanta Das told Cogencis this week, "The mantra of coming out of the 'chakravyuh' has to also be thought through very carefully and be factored in when entering the 'chakravyuh'".

Although the fiscal stimulus of 2008 did enough to prevent a deep slowdown taking hold in India even as the global economy went into a meltdown, the sharp rise in inflation and twin deficits in subsequent years showed the remedy was probably as disastrous as the disease itself.

As the lockdown is lifted from some places on May 4, the government must announce a credible plan. It should articulate its strategy with timelines rather than piecemeal token measures so that businesses and markets are infused with confidence. Even a revised Budget for the year may not be a bad idea.

Finance Minister Nirmala Sitharaman will be well-advised not to get into an economic maelstrom without clarity on an exit plan that will leave the economy unscathed.  End